ABF214  Management Accounting;BUDGET PREPARATION

The aim of the exercise
Many companies take months to prepare their budgets for the year, and most questions that you have attempted to date simplify the process to such an extent that one

forgets the need for frequent revisions to the draft budgets as new data comes in, or forecasts change, or office politics and negotiations take place.
This exercise is designed to remind you of the complexities of the budgetary process, and to ensure further practice with spreadsheets. (Most employers want to see

proficiency with spreadsheets, so put it on your CV!) Obviously we cannot spend the months preparing a budget that an accountant in a large company might spend, but

you will have to prepare a draft budget on a spreadsheet, and you will subsequently have to make amendments to your budget as further information becomes available.
Note
•    You are to work in groups of 4
•    You will be given supplementary information on both Monday 26th January and Monday 2nd February.

Scenario
You are the chief accountant of a company which buys and distributes a single product.  At 28th February 2015 the company’s balance sheet is expected to be:

£
Non Current assets at cost                        4,380,000
less: Depreciation provision                    1,780,000
2,600,000
Current assets:
Stock (56,000 kilograms)                     1,788,000
Receivables:    December sales                   160,000
January sales                   960,000
February sales                   960,000
Fixed administration expenses prepaid                 15,000
Cash at bank                               875,000
4,758,000

less: Current liabilities:
Payables for materials: February purchases           160,000
Fixed administration expenses accrued                   20,000
Taxation                               350,000
Proposed dividend                           120,000
650,000
Less: Non Current Liabilities:
13% £1 Debentures                                  1,000,000
£5,708,000

Ordinary shares of 25p each, fully paid                 2,000,000
Retained profit                             3,708,000
£5,708,000

The following information is available:

1.    The selling price of the product during March and April 2015 will be unchanged at £116 per unit.  The sales director estimates that 16,000 units should be sold

in each of these months.

2.    All sales are on credit, and customers are required to pay their accounts during the second month following the month of sale.  This means that the sales in

December should be received by the company in February.  However, many customers do not adhere to these policies (despite having agreed to them, in writing, in the

sales contract), and typically they pay 80% in the second month following the month of sale, 16% in the third month after sale, with the remainder not being paid at

all.  It is the company’s policy to provide for Doubtful Debts at the earliest opportunity.

3.    Only one kind of material is contained within the product, and 2kg’s of this material comprise one unit.  The purchase price of the material will be £26 per

kg.  During the two months all purchases are on credit, and the company pays suppliers during the month following the month of purchase.  The managing director

requires material stocks to be reduced to 50,000 kg’s at the end of March and 40,000 kg’s at the end of April.

4.    Variable distribution costs of £7 per unit will be payable in the month in which they are incurred.

5.    The company values stock in the balance sheet as the total of direct materials. No other costs are included in the stock value.

6.    Fixed assets costing £325,000 are expected to be purchased for cash on 1st March 2015. The company’s policy is to depreciate its fixed assets at the rate of

15% per annum on cost on a straight line basis, and the depreciation charge for a month is to be regarded as a fixed cost. For this purpose, all months are to be

regarded as of equal length. No fixed assets will be depreciated more than 100% of cost during the period.

7.    The following cash payments, other than to suppliers of materials or for the purchase of non-current assets, wages or variable costs, are expected to be made:

March            April
£            £
Taxation                350,000            –
Proposed dividend                 –        120,000
Fixed administration expenses    206,500        206,500
Fixed wage costs             237,500           237,500

It is to be assumed that the settlement of payables accounts will occur on the due dates.

8.    Accrued and prepaid fixed administration expenses at the month-ends should be:
March             April
£             £
Accrued                22,000        24,000
Prepaid                16,000        17,000

9.    Provision is to be made each month for corporation tax at the rate of 21% of net profit.  The rules on the payment of corporation tax are shown on

https://www.gov.uk/prepare-file-annual-accounts-for-limited-company

10.    Debenture interest is paid on 30 June and 28 February each year.

You are required to present your suggestions for the budget for the months of March and April 2015, the presentation to be made during the week commencing 9th

February. The presentation should last for 15 minutes, and you must be able to answer questions from ‘The Board’.

You will need to be able to address the points made by each manager during the budgetary process, and hence to make your recommendations for the budget. The

aim is to have a budget that can satisfy as many of the required criteria as possible, and that will be approved by the Board.
Marks will be awarded for presentation style as well as the spreadsheet.

There will be a laptop available, with Excel, and a projector linked to the computer.
You must be able to show your spreadsheet to the Board, if necessary, and hence justify your recommendations. The spreadsheet must show the overall position of

the company, with the three financial statements, supporting data, graphs etc – whatever you consider necessary.  All cells in the spreadsheet must be linked with

formulae so that any changes will update the financial statements correctly.

Marks will be awarded as follows:
Spreadsheet Integrity            30%
Accounting  Knowledge            30%
Presentation                    40%
100%

The mark that will be given for the presentation will be for the GROUP, and it is up to you to determine how that group mark is split amongst you.  Thus any

slacker will find him / herself being given a low proportion of the group mark, which is of course only fair. Likewise an excellent contribution deserves extra marks.

In order to avoid victimisation, I will expect every member of the group to sign their agreement with the split of marks, whatever split that might be.

ABF214 Budgeting Assessment

FURTHER INFORMATION 1                Monday 26th January 2015

The following further information has resulted from your meetings over the last month:

1)    The Managing Director requires a Net Profit Margin after tax of at least 6% eac month.  He cannot accept any budget that does not meet these requirements!!
Calculate the position at the moment. Is it adequate?

2)    Ron Stephenson, the Sales Director, now reckons that the sales figures for April are likely to be:
Either – 18,000 units at £105
Or      –  15,000 units at £118
Which is preferable?

3)    The buying manager tells you that the price of materials is likely to increase to £66 a unit (£33 per kg) for a period of two tears, starting from 1st March.

If this happens, what will be the impact on profit and cash?  How high can the price of materials rise before the company can no longer meet the Managing Director’s

target?  What can the company do to reduce the risk it faces?

4)    Steve Bux, Personnel Director, is in negotiations with the main union representing workers at the company (NUAASW). as the annual wage increase is due on 1st

March. The union is demanding an increase of 4.0%, but have been warned by the company not to expect an increase greater than the current UK rate of Consumer Price

Inflation.  Secretly, Steve Bux hopes that the eventual compromise will be a wage increase matching the rate of Retail Price Inflation, but he is worried that, after

many years of below-inflationary wage increases, the union will push very hard for a higher wage increase.

ABF214 Budgeting Assessment

FURTHER INFORMATION 2            Monday 2nd February 2015

The following further information has resulted from your meetings over the last month:

5)    The Managing Director tells you that the cash figure has to be positive each month, as the bank have just told him that they will not allow the company an

overdraft . He suggests that his requirement regarding the levels of finished stocks be relaxed.
Try the following closing stock levels in March:  20,000,  40,000, 60,000 kgs.

6)    Ron has just heard on the grapevine that the main competitor will be reducing their prices by 25% from April 1st. His advice is that we will therefore need to

reduce our prices by 25% from that date. See what effect this would have on gross and net profit: does it make any sense? Or are we better maintaining the existing

price in order to keep margins up? Which of his forecasts do we now take into the budget?

7)    You suddenly hear that Leatside Ltd, a customer owing £85,000, is going into liquidation now. We are unsecured creditors of Leatside, and it doesn’t look like

we will get our money.

8)    Ron Stephenson suggests that he could achieve sales in April of 20,000 units at £112 if the credit period given to customers is increased by 1 month. He

suggests that even if this might result in an overdraft requirement it might be worthwhile, and he knows that another bank allows business overdrafts at a rate of 10%

above the Bank of England base rate per annum.